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Wednesday, March 15, 2017

Fed Raises Rates, Stocks Rally

On the Market

Posted: 3/15/2017 4:15 PM ET

Fed Raises Rates, Stocks Rally

U.S. stocks finished higher after the Federal Reserve hiked the
target for its fed funds rate, as widely expected, while an increase in
crude oil prices gave energy issues a boost. Treasury yields fell
following the Fed's rate decision, while the economic calendar delivered
in line reads on retail sales and consumer price inflation, as well as a
12-year high in homebuilder sentiment. Meanwhile, news on the equity
front was light. The U.S. dollar declined, and gold jumped higher.

The Dow Jones Industrial Average (DJIA) increased 113 points (0.5%) to
20,950, the S&P 500 Index gained 20 points (0.8%) to 2,385, and the
Nasdaq Composite advanced 43 points (0.7%) to 5,900. In moderately-heavy
volume, 913 million shares were traded on the NYSE and 1.9 billion
shares changed hands on the Nasdaq. WTI crude oil rose $1.14 to $48.86
per barrel and wholesale gasoline was unchanged at $1.58 per gallon.
Elsewhere, the Bloomberg gold spot price jumped $21.13 to $1,220.25 per
ounce, and the Dollar Index—a comparison of the U.S. dollar to six major
world currencies—fell 1.0% to 100.71.

Capital One Financial Corp.
(COF $90) finished lower after it announced that its February loan data
showed U.S. borrowing decreased versus the prior month and its
charge-off rate exceeded expectations, more than offsetting upbeat
results from its auto loan segment.

Fed raises target for rates, economic news roughly in line with forecasts

The Federal Open Market Committee (FOMC) concluded its two-day monetary policy meeting,
agreeing to raise the target for its fed funds rate by 25 bps to a
range of 0.75%-1.00%, a move that was widely expected. The FOMC also
kept its rate outlook intact, indicating that most Committee members
projected two additional rate increases for 2017. In its statement, the
FOMC said the pace of any future rate increases would be gradual, and
that near-term risks to the economy are “roughly balanced.” Regarding
inflation, the Fed indicated that it has increased in recent quarters,
moving closer to its 2% longer-run objective, while describing job gains
as "solid" and that business investment "appears to have firmed
somewhat." Minneapolis Fed president Neel Kashkari was the only member
to dissent, opting in favor of a hold.

As well, the Fed provided economic projections, showing only a slight
downward change to gross domestic product for next year, while keeping
its forecast for inflation and the unemployment rate intact. In her
press conference following the decision, Fed Chairwoman Janet Yellen
said the economy continues to expand at a moderate pace and that job
gains should strengthen further, while also noting that core inflation
should reach its 2% benchmark in the next few years. As well, Yellen
indicated that waiting too long to adjust policy could mean an increase
in the rapidity of any increases in the future. Read more insightful
analysis of the Fed’s decision in an article from Schwab’s Director
of Fixed Income, Collin Martin, later today at www.schwab.com/marketinsight, while you can find our article Fed Rate Hike: What Does it Mean for Your Portfolio?, at www.schwab.com/insights, and you can also follow Schwab on Twitter: @schwabresearch.

Advance retail sales (chart)
for February ticked 0.1% higher month-over-month (m/m), matching the
Bloomberg forecast, and compared to January's upwardly revised 0.6%
rise. Also, last month's sales ex-autos were up by 0.2% m/m,
topping expectations of a 0.1% gain, and following the positive revision
to a 1.2% gain seen in the previous month. Sales ex-autos and gas were higher by 0.2% m/m, in line with estimates, and versus January's favorable revision to a 1.1% gain. The retail sales control group,
a figure used to help calculate GDP, rose 0.1%, compared to the
projected 0.2% rise, but the prior month's figure was revised solidly
higher to a 0.8% increase from the previously reported 0.4% gain.

The Consumer Price Index (CPI) (chart) was up 0.1% m/m in February, above estimates of a flat reading, while January's 0.6% increase was unrevised. The core rate,
which strips out food and energy, gained 0.2% m/m, matching
expectations and compared to January's unrevised 0.3% rise. Y/Y, prices
were 2.7% higher for the headline rate, in line with forecasts, while
the core rate was up 2.2%, also matching projections. January y/y
figures showed an unrevised 2.5% rise and an unadjusted 2.3% increase
for the headline and core rates respectively.

The Empire Manufacturing Index showed output from the New York
region slipped but remained solidly in expansion territory (a reading
above zero) for March. The index dipped to 16.4 from February's
unrevised 18.7 level, with forecasts calling for a 15.0 reading.

The National Association of Home Builders (NAHB) Housing Market Index showed
homebuilder sentiment this month jumped to 71—the highest level since
June 2005—compared to expectations for it to remain at February's
unrevised 65 level, with a 50 mark separating good and poor conditions.
The NAHB said builders are buoyed by President Trump's actions on
regulatory reform, and while they are clearly confident, it expects some
moderation moving forward amid a number of challenges, including rising
material prices, higher mortgage rates, and shortages of lots and
labor.

The MBA Mortgage Application Index rose 3.1% last week, following the previous week's 3.3% gain. The increase came as a 4.1% gain for the Refinance Index was met with a 2.3% rise for the Purchase Index. The average 30-year mortgage rate jumped 10 basis points (bps) to 4.46%.

Treasuries moved higher following the Fed's decision, as the yield on
the 2-year note fell 9 bps to 1.30%, the yield on the 10-year note was
down 10 bps to 2.50% and the 30-year bond rate declined 7 bps to 3.11%.

The domestic economic calendar will continue to be busy tomorrow, beginning with housing starts and building permits,
forecasted to show starts rose 1.4% m/m during February to an annual
rate of 1,264,000, and permits declined 1.9% to a 1,268,000 pace,
followed by weekly initial jobless claims, with economists expecting a level of 240,000, down slightly from the prior week's 243,000. Rounding out the day will be the Philly Fed Manufacturing Index, expected to decline to a level of 30.0 for March from the 43.3 posted last month, as well as the Job Openings and Labor Turnover Survey (JOLTS),
a measure of unmet demand for labor, with the report anticipated to
show that 5.56 million jobs were available to be filled in January,
above the 5.50 registered in the month prior.

Europe higher, Asia mixed ahead of Fed decision

European equities traded modestly higher, with oil & gas issues
leading the way as crude oil prices recovered from a recent tumble
following some bullish oil inventory data. The markets appeared cautious
ahead of today's monetary policy decision in the U.S., which is
expected to deliver a rate hike. Political uncertainty in the region
continued to garner heavy attention, with flared-up U.K. Brexit
uneasiness as Prime Minister May was granted the right to trigger
Article 50 yesterday, which will begin the formal process of negotiating
the nation's exit from the European Union. This came as Scottish First
Minister Sturgeon said earlier this week that she will start the legal
process of preparing for a second independence referendum.

Reports set for release on tomorrow's international economic calendar
include employment data from Australia, and CPI from the Eurozone, while
both the Bank of Japan and the Bank of England will conduct their
respective monetary policy meetings, with economists expecting no change
to the stance of either nation.

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